DC lottery contract is subject of federal probe

A federal grand jury is investigating the awarding of the $38 million contract to run the District of Columbia lottery, a process that raises further questions about corruption in a city government already beleaguered by criminal prosecutions.

Although no one has yet been charged in the lottery probe, authorities are looking for evidence of crimes including bribery and illegal steering of contracts, and numerous officials are under scrutiny, according to several people familiar with the probe. They spoke on condition of anonymity because they've been instructed not to impede the ongoing investigation.

Regardless of the outcome of the probe, the awarding of the lottery contract - which went to Greek gaming company Intralot in 2009 - illustrates systemic problems that open the door for elected officials to play politics with the contracting process and influence who wins.

The lottery investigation increases the scrutiny on a city government already reeling from unrelated prosecutions that targeted several of the district's elected officials and their aides. Three aides to Mayor Vincent Gray's 2010 campaign have pleaded guilty to federal crimes, and the mayor's campaign remains under investigation. Meanwhile, two councilmembers have resigned in the past year after pleading guilty to felonies - one of which involved stealing city money earmarked for youth sports.

The lottery probe has the potential to be the most sweeping of them all because of the number of people being investigated. The awarding of the contract was a bruising, years-long fight that left no one completely satisfied - including the winning bidders.

Key stumbling blocks with the district's contracting system include the include the ability of the D.C. Council to block contracts worth more than $1 million and the de facto requirement that major contractors have a local partner, even if that partner has no expertise in the service being provided.

"This is one of the worst processes, if not the worst, that I've seen in 45 years of government service, both federal and local," said Doug Patton, a lobbyist and former deputy mayor who was involved in a losing bid for the lottery. "The quicker they get to the bottom of this, the better."

The process began in 2007, when the district's Office of the Chief Financial Officer solicited bids for a new lottery operator. By the end, significant questions were raised about why one seemingly surefire bid was rejected by the council, the qualifications of local partner eventually included in the contract and the unusual circumstances surrounding the authorization of online gambling. These are among the issues federal authorities are investigating.

Only a handful of large firms have the technology to operate state-level lottery systems. But district contracting rules make it all but impossible to win a major contract without a local partner that's been certified as a disadvantaged local business. The program grew out of minority set-asides implemented under former Mayor Marion Barry.

Intralot partnered with real estate developer Warren Williams Jr. to submit the winning bid. The CFO's office informed the council that the new partnership would provide better technology than the previous lottery vendor and save the city about $5 million a year. Yet the council was cool to the prospect of approving the contract, in part because of Williams' political connections. He was a friend and supporter of then-mayor Adrian Fenty.

For months, Gray - who would later run against Fenty and accuse the mayor of giving contracts to his cronies - refused to bring the contract up for a vote. Behind the scenes, according to court papers filed in a civil lawsuit, Gray was pressuring Chief Financial Officer Natwar Gandhi to get rid of Williams. The chief contracting officer for the CFO's office alleges in the lawsuit that he was pressured to rebid the contract, and when he refused - insisting it would be illegal - he was demoted and fired.

Investigators have been asking about the motivation behind Gray's and Gandhi's actions during this period, according to people familiar with the probe. Gray's attorney, Robert Bennett, declined to comment on the investigation. Gandhi declined to be interviewed. His spokesman, David Umansky, said Gandhi "never lobbied for or against any bidder."

Meanwhile, councilman Jim Graham inserted himself into the process. During a meeting with Williams and his partners, Graham made an offer: He would support Williams' lottery bid if Williams withdrew from a development deal around a Metro subway station, according to emails between participants in the meeting. Graham also served on the Metro board at the time, and Williams and his attorney refused, describing it as potentially illegal meddling in the contracting process.

The FBI and U.S. Attorney's Office have been asking about Graham's actions, according to people with knowledge of the probe. An investigation conducted by a law firm for Metro determined that Graham acted improperly but was not motivated by any financial interest. Graham does not deny making the offer but insists he has committed no crimes.

Councilwoman Yvette Alexander has also been tied to a questionable offer to Williams, according to people familiar with the investigation. Two staffers for Alexander asked Williams for money to prove his loyalty to the councilmember, with one putting the price tag at $20,000, according to people familiar with the probe. Investigators are aware of the request and have asked about it, according to a person they have interviewed. Alexander told AP she made no such offer and that she doesn't take the allegations seriously.

In December 2008, the council voted 8-5 to reject the Williams-Intralot partnership.

The CFO's office solicited new bids, and Intralot won again, this time without a local partner. But its representatives and lobbyists became convinced they could not gain the council's support without one.

Enter local businessman Emmanuel Bailey. A friend of Intralot lobbyist and former councilmember Kevin Chavous - who had introduced him to Gray during the first round of bidding - Bailey was brought on as a subcontractor with a 51 percent stake. Because he entered the contract after the procurement process, he didn't get the same level of scrutiny from the CFO's office before the council voted to approve the contract.

Bailey's company operated out of his mother's home. When city inspectors visited it, they found two desks, two computers and a printer in a family room. They found no company letterhead or business cards. Inspectors wrote in their report that the company should find a suitable office space before being considered for certification as a legitimate local business.

Two days later, Bailey's company was certified, an action the city's inspector general later found was improper. A local firm involved in a competing bid was denied certification - and the inspector general said that move was improper as well. The inspector general's report gave ammunition to critics of the lottery deal, but the office has no enforcement authority.

The contract awarded to Intralot and Bailey included a potentially lucrative option to operate an online gambling system if online gambling were legalized in the district. Councilmember Michael A. Brown worked to make that happen - but not by introducing a standalone bill. Instead, he inserted language into a budget bill that was initially circulated at 2:17 a.m.

Several of Brown's colleagues have said they did not realize they were voting to authorize online gambling - which Brown disputes. But the council ultimately voted to repeal it amid criticism about lack of transparency.

The effort took its toll on Brown, who lost his bid for re-election. Federal investigators are examining his actions and his employment with a lobbying firm that has a gaming practice, according to the people familiar with the probe. Brown no longer works for the firm and says there was no conflict of interest.

Brown says he has not been contacted by investigators and has no reason to believe he is a target of the probe. He is also friends with Bailey, who has made campaign contributions to the outgoing councilmember.

The defeat of online gambling was a financial blow to Intralot and Bailey, but they continue to hold the lottery contract, and the CFO's office has not reported any problems with their performance.

FILE - In this May 29, 2012 file photo, Washington Mayor Vincent Gray speaks at a news conference on Capitol Hill in Washington. A federal grand jury is investigating the awarding of the $38 million contract to run the District of Columbia lottery, a process that raises further questions about corruption in a city government already beleaguered by criminal prosecutions. (AP Photo/J. Scott Applewhite, File)